NAFTA's Economic Effects: Jobs, Wages, and the Peso

Introduction to NAFTA and Its Goals

The North American Free Trade Agreement (NAFTA) went into effect on January 1, 1994. NAFTA allows U.S. companies to sell their goods in Mexico tariff-free and allows Mexicans to set up low-wage factories to produce goods for sale in the United States duty-free (Dowling, 1996). The agreement removed most barriers to investment among Canada, the United States, and Mexico. Its intention was to boost the economies of all three countries by expanding their potential markets and allowing each nation to take advantage of what the other two had to offer. Since its adoption, its effects have been debatable, especially concerning safety and environmental issues in the United States and the effect on the Mexican peso.

When we begin to read the wealth of opinions about NAFTA, one thing becomes clear: there is no set standard by which to measure its effects. When we talk about something being good for the economy, do we mean jobs lost or gained, changes in productivity, changes in the average American wage, Gross Domestic Product, or shifts in consumer prices? There are too many factors to consider to make a general statement about whether NAFTA has been good or bad for the economy of any of the countries involved.

NAFTA's Benefits for U.S. Businesses and Consumers

Many U.S. businesses see NAFTA as both a way to expand into new markets and as a source of low-wage production workers. The first states to take advantage of this opportunity were those physically close to Mexico: Texas, California, and Florida. Other states are now beginning to take advantage of the agreement as well (Dowling, 1996).

Donald Dowling, a partner at Graydon, Head & Ritchey specializing in international law, argues that the key to success in Mexico lies in structuring business plans around several important considerations. Mexicans are eager for American pop culture and regard U.S. goods as being of high quality (Dowling, 1996). Although Mexico is often stereotyped as a uniformly poor country, certain regions contain a growing class of consumers hungry for U.S. products. Additionally, Mexican President Ernesto Zedillo maintained a low tolerance for government corruption — a shift that benefited foreign companies seeking to establish themselves in Mexico (Dowling, 1996).

In a speech before the National Foreign Trade Council on July 26, 2001, U.S. Trade Representative Ambassador Robert Zoellick offered a strong endorsement of the agreement:

"We can begin with what NAFTA and open trade have meant for the average U.S. family. And these are conservative estimates: NAFTA and the Uruguay Round together have resulted in higher incomes and lower prices for goods, with benefits amounting to $1,300 to $2,000 a year for a family of four. That is real money for farmers, nurses, teachers, police officers, and office workers. The real beneficiaries are lower-income Americans, who bear a disproportionate burden when prices for food, clothing, and appliances are kept artificially high because of trade barriers… NAFTA has been pulling American goods and grains into Mexico, benefiting consumers and supporting quality U.S. jobs here at home. In the seven years since NAFTA's implementation, U.S. exports to Mexico and Canada now support 2.9 million American jobs — 900,000 more than in 1993. Such jobs pay wages that are 13 to 18% higher than the average American wage." (Zoellick, 2001)

Ambassador Zoellick's assessment holds that NAFTA has delivered more income, higher wages, and more jobs for Americans. However, his analysis does not address the effects of NAFTA on Mexico itself, nor does it account for other serious concerns that emerged as a direct result of opening the U.S.–Mexico border.

The Mexican Peso Crisis and Its Impact

One key factor Dowling identifies is that the peso suffered a severe devaluation after 1994. This devaluation made goods and services in Mexico — including those from the United States — cheaper for those paying with U.S. dollars (Dowling, 1996). While NAFTA has been a significant winner for American business, many Mexicans blame the fall in the peso's value on the agreement. The peso crisis eroded Mexico's purchasing power and threatened the stability of the U.S.–Mexico relationship, resulting in a less welcoming attitude toward foreign businesses operating in Mexico (Dowling, 1996).

In Mexico, the situation appears to be the opposite of Zoellick's rosy picture for the United States: wages declined in real terms and the peso's devaluation inflicted serious economic harm. This contrast highlights one of NAFTA's central tensions — what benefits one country's economy may come at the expense of another's.

Conclusion: No Clear Winner

The only clear conclusion that can be drawn is that on the issue of whether NAFTA has been good or bad, there is no clear winner of the debate. The issues are complex, and no one seems to have developed a reliable measure of NAFTA's effectiveness. For every supporter who cites favorable statistics on major economic indicators, an equally convincing opponent can be found. Another complicating factor is determining how much of the good and bad attributed to NAFTA is actually caused by NAFTA. Some argue that the severe decline in the peso's value was already underway long before NAFTA took effect, and that the agreement is being used as a scapegoat for Mexico's financial troubles that have other underlying causes.

The same logic applies to NAFTA's apparent effects on the U.S. unemployment rate or Gross Domestic Product. Attributing these conditions to a single factor ignores others — such as the boom-and-bust cycle in the U.S. technology sector, inflation rates, military conflicts, weather events, and the hundreds of other variables that influence economic indicators in all three countries.

Unfortunately, the more research one conducts on this subject, the more unclear the issues become. In order to resolve the debate, a standardized set of metrics will need to be established to measure NAFTA's effects consistently over time. Until then, the question of whether NAFTA has been a net positive or negative for the United States, Mexico, and Canada remains open — and everyone remains entitled to their own opinion.

Works Cited

Dowling, Donald Jr. "The pros and cons of business in Mexico: South of the border, many pros are cons." Business Journal, Going Global section. American Business Journals, November 22, 1996 print edition.

Owner-Operator Independent Drivers Association (OOIDA). "Senate quotes: the good, the bad, and the ugly." Quotes from July 27, 2001 Senate floor debate on Mexican border opening. 2002. OOIDA Website. Accessed February 2002.

Subcommittee on Highways and Transit Hearing on NAFTA (written testimony): Arbitration Panel Decision and Safety Issues With Regard to Opening the U.S./Mexican Border to Motor Carriers, July 18, 2001. Washington, D.C.

Zewe, Charles, Correspondent. "Three years later, NAFTA's effects still debated." June 1997. Cable News Network (CNN). Accessed February 2002.

Zoellick, Ambassador Robert. Speech before the National Foreign Trade Council, U.S. Trade Representative, Washington, D.C., July 26, 2001.